Why healthcare price growth lags during inflation
Healthcare prices have grown more slowly than economywide prices since mid-summer, a trend economists describe in a new report as "quite extraordinary."
Healthcare price growth—measured by the Health Care Price Index—was 2% higher in September than it was a year earlier. By comparison, the Consumer Price Index, which measures all goods and services purchased—was 5.4% in September, according to a new report from Altarum. The not-for-profit research firm also found healthcare comprised a slightly smaller share of the overall economy in August than it did a year earlier.
This is the first period in which Altarum has observed economywide prices growing at a faster rate than healthcare prices, said Corey Rhyan, a senior analyst with Altarum.
It's not surprising that economywide prices are rising. Prices tend to rise during economic recoveries. On top of that, labor shortages are upping companies' expenses, prompting them to boost prices. Supply chain constraints are making it difficult for manufacturers to perform services, making them more expensive. Government stimulus dollars in circulation up peoples' willingness to spend money.
"All of those things I would think would have similar impacts on healthcare prices," Rhyan said. "The reason why healthcare prices aren't rising as fast as economywide prices is a little bit of a mystery right now."
There are a few hypotheses floating around. One is that healthcare prices are more set than in other industries. Hospitals can't just raise prices in a particular month, they're bound by contracts with insurers.
Another possibility is that prices are growing slower now because they spiked early on in the pandemic when the federal government bumped Medicare rates and Medicaid reimbursements to states, Rhyan said. In some cases, private insurer rates also accelerated in late 2020 and early 2021.
"The lower growth rates in healthcare prices over this period is partly because you're comparing to a period in the year where healthcare price growth was very high," he said.
Another ongoing mystery Altarum has been tracking is the negative year-over-year price growth in prescription drugs, which hit 12 straight months in September. The report noted that the negative growth rate of 1.6% is less severe than the prior month and the prescription drug index month-over-month is higher than in August, indicating a possible rise in prices soon.
Importantly, Altarum's data only include retail drugs, those bought at pharmacies or by mail order, and not the more expensive specialty drugs administered by physicians or in hospitals. Rhyan also noted that drug prices are impacted by the mix of drugs sold, whether generic or branded, and the underlying prices paid. Altarum's data do not include rebates, which could be having an effect.
Healthcare comprised 17.5% of the country's gross domestic product in August, compared to 18% in January 2020 and 17.9% in August 2020.
That's partly because GDP growth has been very robust since it bottomed out in April 2020, when it was 15% below its January 2020 level. By August 2021, GDP growth had exceeded its January 2020 reading by 6.6%, Altarum found.
Healthcare spending might be growing at a slower rate because the delta variant of the coronavirus is keeping patients from getting healthcare services, suppressing spending, said George Miller, an Altarum fellow. Hospitals in some areas hard hit by the variant have reimposed limits on elective services. The staffing shortages plaguing healthcare and now exacerbated by burnout are likely also contributing. Healthcare hiring nosedived in September as it declined for the third time this year, per the latest federal data.
Another theory being floated is that healthcare spending will remain lower than it was in the past indefinitely, Miller said.
Within healthcare, some areas of spending have recovered more than others over the past 12 months. Hospital care's 12-month growth rate, for example, was 9.8% in August 2021 after dropping just 2.8% in August 2020. Physician and clinical services was 9.5% in August 2021 after dropping 4.9% in August 2020.
Dental services, by contrast, had a 13% 12-month growth rate in August 2021, which meant it hadn't fully rebounded from its August 2020 negative growth rate of 18.6%. Similarly, nursing home care was at 5.3% in August 2021, below its August 2020 negative growth rate of 9.5%.
"There are some sectors of healthcare spending that have yet to reach their pre-pandemic level, despite having over 18 months of growth potential now," Rhyan said.